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    CULP   US2302151053

CULP, INC.

(CULP)
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CULP : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

07/16/2021 | 10:28am EDT

We have prepared this Management's Discussion and Analysis as an aid to understanding our financial results. It should be read in conjunction with the consolidated financial statements and notes and other exhibits included elsewhere in this report. It also includes management's analysis of past financial results and certain potential risk factors that may affect future results, as well as approaches that may be used to manage those risks. See "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this report, together with the section of this report titled "Item 1A. RISK FACTORS," for a discussion of factors that may cause results to differ materially.

We sold our majority ownership interest in eLuxury, LLC ("eLuxury") on March 31, 2020, resulting in the elimination of our home accessories segment at such time. Accordingly, the results of operations and assets and liabilities for this segment are excluded from the company's continuing operations for the fiscal 2020 year (and for all prior periods of comparison) and presented as a discontinued operation in this report.

General

Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. Fiscal 2021, 2020, and 2019 included 52 weeks, 53 weeks, and 52 weeks, respectively.

Continuing Operations

Our continuing operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. We have mattress fabric operations located in Stokesdale, NC, High Point, NC, and Quebec, Canada. Additionally, we acquired the remaining fifty percent ownership interest in our former unconsolidated joint venture in Ouanaminthe, Haiti during the fourth quarter of fiscal 2021, such that we are now the sole owner with full control of this cut and sewn mattress cover operation.

The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. We have upholstery fabric operations located in Shanghai, China, and Burlington, NC. We also commenced construction on a new facility in Haiti during the fourth quarter of fiscal 2021. This new operation will be dedicated to production of cut and sewn upholstery kits and is expected to begin operating during the second quarter of fiscal 2022. Additionally, Read Window Products, LLC ("Read"), a wholly-owned subsidiary with operations located in Knoxville, TN, provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services of Read's products, to customers in the hospitality and commercial industries. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.

Discontinued Operation - Home Accessories Segment

Through our June 22, 2018, majority investment in eLuxury, our operations also previously included a home accessories segment, which manufactured, sourced, and sold finished bedding accessory and home good products directly to consumers and businesses through global e-commerce and business-to-business sales channels. However, we sold our ownership interest in eLuxury on March 31, 2020, in order to focus on the company's core mattress and upholstery fabrics businesses, which we believed would increase our liquidity during the unprecedented disruption arising from the COVID-19 pandemic. This sale of eLuxury resulted in the elimination of our home accessories segment at such time. Accordingly, the results of operations and assets and liabilities for this segment are excluded from the company's continuing operations for the fiscal 2020 year (and for all prior periods of comparison) and presented as a discontinued operation in this report. See Note 3 - Discontinued Operations, of the consolidated financial statements for further details.

Impact of COVID-19

For a discussion of how COVID-19 has affected and may continue to affect our business and financial condition, see the discussion under the heading "COVID-19 Impact and Business Response" in Part I, Item 1 of this report, as well as the Risk Factors set forth in Part I, Item 1A of this report.

Executive Summary

We evaluate the operating performance of our current business segments based upon income (loss) from continuing operations before certain unallocated corporate expenses, asset impairment charges, restructuring expense (credit) and related charges, and other non-recurring items. Cost of sales in each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished good purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate


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expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, and other miscellaneous expenses.

Results of Continuing Operations



                                                   Twelve Months Ended
                                                  May 2,          May 3,
(dollars in thousands)                             2021            2020           Change
Net sales                                       $   299,720$  256,166            17.0 %
Gross profit from continuing operations              49,832         40,498            23.0 %
Gross profit margin from continuing
operations                                             16.6 %         15.8 %            80 bp
Selling, general, and administrative expenses        37,756         34,424             9.7 %
Income (loss) from continuing operations             12,076         (7,568 )          N.M.
Operating margin from continuing operations             4.0 %         (3.0 )%          700 bp
Income (loss) before income taxes from
continuing operations                                10,880         (7,679 )          N.M.
Income tax expense                                    7,693          3,354           129.4 %

Net income (loss) from continuing operations 3,218 (11,158 ) N.M.




Net Sales

Overall, our net sales increased 17.0% in fiscal 2021 compared with a year ago, with mattress fabric net sales increasing 20% and upholstery fabric net sales increasing 13.9%. Fiscal 2021 had 52 weeks compared to 53 weeks in fiscal 2020. Also, fiscal 2020 was affected by the severe economic disruption caused by the COVID-19 pandemic during the fourth quarter, as retail home furnishings stores across the country closed and many of our customers shut down or limited their operations for several weeks.

The increase in net sales for both our mattress fabrics and upholstery fabrics segments during fiscal 2021 reflects increased demand driven by a greater consumer focus on the home, combined with our ability to meet this surge in demand and respond quickly to the needs of our customers through our flexible global platform and the support of our long-term supplier relationships. This increase was partially offset by lower net sales for both segments during the first quarter of fiscal 2021 that resulted from the economic disruption caused by the COVID-19 pandemic, especially in the beginning of the first quarter as customers and retail stores were just beginning to resume operations following pandemic-related shutdowns.

See the Segment Analysis located in the Results of Continuing Operations section below for further details.

Income Before Income Taxes from Continuing Operations

Overall, our income before income taxes from continuing operations was $10.9 million for fiscal 2021, compared with loss before income taxes from continuing operations of $(7.7) million for the prior year. The results for fiscal 2021 include an $819,000 gain on bargain purchase associated with our fourth-quarter acquisition of the remaining fifty percent ownership interest in our former unconsolidated joint venture located in Haiti. It also includes $2.2 million in other expense relating primarily to foreign exchange rate fluctuations associated with our operations in China. Loss before income taxes from continuing operations for fiscal 2020 included non-cash asset impairment charges of $13.7 million associated with goodwill and certain intangible assets, of which $11.5 million related to the mattress fabrics segment and $2.2 million related to the upholstery fabrics segment, a $70,000 restructuring credit associated with the closure of our Anderson, SC, upholstery fabrics facility, as well as $902,000 in other expense.

Our improved operating performance for fiscal 2021 primarily reflects higher sales as compared to the prior year, partially offset by significant pressure from unfavorable foreign exchange rate fluctuations associated with our operations in China, as well as higher SG&A expense primarily due to increased incentive compensation costs. It also reflects pressure from the sales disruption from the COVID-19 pandemic at the beginning of the first quarter that affected both of our segments, along with significant inventory reductions and manufacturing inefficiencies associated with the dramatic ramp up in operations for our mattress fabrics segment during the latter part of the first quarter. We also experienced operating inefficiencies in connection with servicing the surge in demand in the mattress fabrics business during the fourth quarter. Higher freight and raw material costs, as well as disruption in our customers' supply chains for non-fabric components, also adversely affected our operating performance to some extent during fiscal 2021.

See the Segment Analysis located in the Results of Continuing Operations section below for further details.


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Income Taxes

We recorded income tax expense of $7.7 million, or 70.7% of income before income tax expense from continuing operations, in fiscal 2021, compared with income tax expense of $3.4 million, or (43.7%) of loss before income tax expense from continuing operations in fiscal 2020. Income tax expense during fiscal 2021 included a $4.9 million net income tax charge, which consists of an $8.5 million non-cash income tax charge to record a full valuation allowance against the company's U.S. net deferred income tax assets, partially offset by a $3.6 million non-cash income tax benefit to re-establish certain U.S. Federal net operating loss carryforwards in connection with U.S.Treasury regulations enacted during the first quarter of fiscal 2021 regarding the Global Intangible Low Taxed Income ("GILTI") tax provisions of the Tax Cuts and Jobs Act of 2017 ("TCJA"). Income tax during fiscal 2020 included $1.5 million of GILTI tax that did not recur in fiscal 2021 due to the recent change in the GILTI tax regulations noted above. Additionally, our effective income tax rates for fiscal 2021 and fiscal 2020 were adversely affected by the continued shift in the mix of our taxable income that has been mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.

During fiscal 2021, we had income tax payments totaling $3.0 million, which mostly represented income tax payments of $4.3 million associated with our foreign operations located in China and Canada, partially offset by income tax refunds of $1.5 million that were associated with our U.S. AMT credit carryforward balance. During fiscal 2020, we had income tax payments totaling $5.0 million, all of which pertained to our foreign operations located in China and Canada.

Refer to Note 12 of the consolidated financial statements for further details regarding our provision for income taxes from continuing operations.

Liquidity

As of May 2, 2021, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively "cash and investments") totaled $46.9 million compared with $77.1 million as of May 3, 2020.

The decrease in our cash and investments from the end of fiscal 2020 is attributable to repayment of all our outstanding borrowings associated with our U.S. and China lines of credit and the loan we received under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") of 2020 (such loan, the "PPP loan"), which borrowings totaled $38.4 million. Excluding the repayments made on our lines of credit and the PPP loan, our cash and investments as of May 2, 2021, would have increased $8.2 million as compared with May 3, 2020. This increase was mostly due to (i) net cash provided by operating activities totaling $21.5 million, partially offset by (ii) $6.7 million of capital expenditures that were mostly related to our mattress segment, (iii) cash payments of $954,000 associated with our acquisition of the remaining fifty percent ownership interest in our former unconsolidated joint venture in Haiti, and (iv) cash payments of $5.3 million in the form of regular quarterly dividend payments to shareholders.

Our net cash provided by operating activities of $21.5 million during fiscal 2021 increased $16.5 million compared with $5.0 million during fiscal 2020. The increase reflects higher earnings and a focused attention on working capital management through fiscal 2021. Additionally, our discontinued operation had net cash used in operating activities totaling $(2.3) million and net cash used in investing activities totaling $(134,000) during fiscal 2020. Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions from the company and the former non-controlling interest holder of eLuxury, totaling $2.4 million during fiscal 2020. We believe our liquidity has improved in the absence of the former home accessories segment due to the significant losses incurred by that segment and the funding of its working capital requirements primarily by us through loans and capital contributions that are no longer required.

As of May 2, 2021, there were no outstanding borrowings under our lines of credit.


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Dividend Program

On June 15, 2021, our board of directors approved a regular quarterly cash dividend of $0.11 per share. This payment will be made on July 16, 2021, to shareholders of record as of July 9, 2021.

During fiscal 2021, dividend payments totaled $5.3 million, which represented quarterly dividend payments ranging from $0.105 to $0.11 per share. During fiscal 2020, dividend payments totaled $5.1 million, which represented quarterly dividend payments ranging from $0.10 to $0.105 per share.

Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. Future dividend payments will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.

Common Stock Repurchases

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased, and the timing of such purchases, will be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

As part of our comprehensive response to the COVID-19 global pandemic, we announced on April 3, 2020, that our board of directors temporarily suspended the share repurchase program given the ongoing economic disruption and uncertainty. On March 2, 2021, our board of directors reinstated the share repurchase program.

During fiscal 2021, we did not repurchase any shares of common stock. As a result, as of May 2, 2021, we had $5.0 million available for additional repurchases of our common stock. During fiscal 2020, we repurchased 142,496 shares of our common stock at a cost of $1.7 million pursuant to the authorization approved by our board of directors on September 5, 2019.

Results of Continuing Operations

The following table sets forth certain items in our consolidated statements of net income (loss) as a percentage of net sales.



                                                                Fiscal      Fiscal
                                                                 2021        2020
Net sales                                                         100.0 %     100.0 %
Cost of sales                                                     (83.4 )     (84.2 )
Gross profit from continuing operations                            16.6        15.8
Selling, general and administrative expenses                      (12.6 )     (13.4 )
Asset impairments                                                     -         5.4
Restructuring credit                                                  -           -
Income (loss) from continuing operations                            4.0        (3.0 )
Interest income, net                                                0.1         0.4
Gain on bargain purchase                                            0.3           -
Other expense                                                      (0.7 )      (0.4 )

Income (loss) before income taxes from continuing operations 3.6 (3.0 ) Income tax expense *

                                               70.7       (43.7 )
Income (loss) from investment in unconsolidated joint venture         -           -
Net income (loss) from continuing operations                        1.1        (4.4 )




*   Calculated as a percentage of income (loss) before income taxes from
    continuing operations.


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2021 compared with 2020

Segment Analysis

Mattress Fabrics Segment



                                                   Twelve Months Ended
                                                   May 2,        May 3,
(dollars in thousands)                              2021          2020        Change
Net sales                                        $  157,671$ 131,412        20.0 %
Gross profit from continuing operations              23,864        16,278        46.6 %

Gross profit margin from continuing operations 15.1 % 12.4 % 270 bp SG&A expenses

                                        12,066        11,354         6.3 %
Income from continuing operations                    11,798         4,924       139.6 %
Operating margin                                        7.5 %         3.7 %       380 bp




Net Sales

Mattress fabrics sales increased 20.0% in fiscal 2021 compared to the prior year, which was materially affected by the COVID-19 pandemic during the fourth quarter.

The increase in net sales for fiscal 2021 generally reflects an increase in demand driven by the strong consumer focus on the home environment, combined with our ability to service the higher demand through our global platform. This increase was partially offset by a decrease in net sales during the first quarter of fiscal 2021 that resulted from the economic disruption caused by the COVID-19 pandemic, especially in the beginning of the first quarter as customers and retail stores were just beginning to resume operations following pandemic-related shutdowns.

During fiscal 2021, we benefitted from our focus on product innovation and creative designs with growth across a diversified group of new and existing customers, including further growth in our sewn mattress cover business. Our fabric-to-cover model, as well as our on-shore, near-shore, and off-shore supply chain strategy, is proving to be a preferred platform for providing our mattress cover customers with the agility and value they need for their business.

The strength and flexibility of our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey enabled us to support the strong demand trends and serve the needs of our mattress fabrics and cover customers throughout fiscal 2021. We also benefitted from our virtual design capabilities, including our 3D rendering services, which allowed us to strengthen our position with customers. In addition, we believe the domestic mattress industry and, in turn, our business, began to realize some benefits during the third and fourth quarters from the preliminary antidumping duties imposed in October 2020 by the U.S. Department of Commerce on mattress imports from seven countries.

Looking ahead, we are faced with some continued near-term pressures relating to ongoing customer capacity limitations, primarily due to supply chain disruption for non-fabric components and labor shortages, but we expect that most of these headwinds are temporary. Additionally, the ongoing impact and duration of the COVID-19 pandemic remains unknown and depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, actions taken to contain its spread and mitigate the public health and economic effects, the short- and long-term disruption on the global economy, consumer confidence, unemployment, employee health, and the financial health of our customers, suppliers, and distribution channels. At this time, we cannot reasonably estimate the ongoing impact of the COVID-19 pandemic on our mattress fabrics segment; however, if conditions relating to the pandemic worsen, the disruption could adversely affect our operations and financial performance.

Gross Profit and Operating Income

The increase in mattress fabrics profitability was primarily due to the higher mattress fabrics sales noted above, offset somewhat by sales disruption from the COVID-19 pandemic during the first quarter. Profits were also adversely affected by significant inventory reductions and manufacturing inefficiencies associated with the dramatic ramp up in our operations during the latter part of the first quarter, as well as operating inefficiencies in connection with servicing a surge in demand in our business during the fourth quarter. In addition, operating performance for fiscal 2021 was pressured by unfavorable foreign exchange rate fluctuations in China and Canada, increased raw material prices and freight costs, and disruption in our customers' supply chains for non-fabric components. Notably, although we announced a price increase during the fourth quarter of fiscal 2021 to help mitigate higher freight and raw material costs, this action did not take effect until the beginning of fiscal 2022, resulting in a temporary cost-price lag that affected our operating performance for the fourth quarter.


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We expect continued near-term pressures relating to increasing raw material and freight costs and ongoing foreign currency fluctuations in China and Canada. We expect that most of these headwinds are temporary and will be mitigated to some extent by recent price increase noted above.

CLASS International Holdings, Ltd. ("CIH")

Overview

Effective January 1, 2017, Culp International Holdings, Ltd. ("Culp International"), a wholly-owned subsidiary of the company, entered into a joint venture agreement pursuant to which Culp International owned 50% of Class International Holdings, Ltd. ("CIH"). Effective February 1, 2021, (sometimes referred to as the "acquisition date"), Culp International entered into a Share Purchase Agreement with its former joint venture partner pursuant to which Culp International acquired the remaining 50% ownership interest in CIH. CIH produces cut and sewn mattress covers and is housed in two facilities totaling 120,000 square feet, located in a modern industrial park on the northeastern border of Haiti. We believe having sole ownership of this operation enhances our capacity and increases our flexibility by having near-shore capabilities that help us meet the needs of our mattress cover customers.

Our now-100% ownership interest in connection with this acquisition had a fair value totaling $2.7 million, of which $1.7 million represents the fair value of our previously held 50% ownership interest in CIH, and $954,00 reflects the purchase price that was mostly paid at closing on February 1, 2021, for the remaining 50% ownership interest in CIH. In accordance with ASC Topic 805-10-25-10, we remeasured our previously held 50% ownership interest in CIH at its acquisition date fair value. As of the acquisition date, the fair value of our previously held 50% ownership interest totaling $1.7 million represented its carrying amount, and therefore, no gain or loss was recognized in earnings in connection with the remeasurement.

Assets Acquired and Liabilities Assumed


The following table presents the final allocation of the consideration
transferred to the assets acquired and liabilities assumed based on their fair
values.



(dollars in thousands)                  Fair Value
Cash and cash equivalents              $         62
Accounts receivable                             169
Inventory                                        31
Right of use assets                           2,544
Equipment and leasehold improvements            846
Accounts payable                               (155 )
Gain on bargain purchase                       (819 )
                                       $      2,678

Equipment and leasehold improvements will be depreciated on a straight-line basis over their remaining useful lives ranging from 1 to 10 years.

Gain on Bargain Purchase

Concurrent with our acquisition of the remaining 50% ownership interest in CIH, our former joint venture partner sold its mattress related business to a third party. Our acquisition of the remaining 50% ownership interest in CIH was undertaken due to this sale and the terms negotiated in connection therewith. As a result, the $3.5 million fair value of the identifiable assets acquired and liabilities assumed exceeded the $2.7 million fair value of our now-100% ownership interest. Consequently, in accordance with ASC Topic 825-30-25-4, we (i) reassessed the recognition and measurement of the assets acquired, liabilities assumed, and previously held ownership interest; (ii) gained an understanding why there was a bargain purchase; and (iii) reviewed the rebate and supply agreements that were executed concurrently with the Share Purchase Agreement. As part of our review of the rebate and supply agreements, we verified that the terms of these agreements were consistent with fair market value terms and are considered separate transactions and not considered part of the business combination in accordance with ASC Topic 805-20-25-21. Accordingly, this acquisition has been accounted for as a bargain purchase and, as a result, we recognized a gain of $819,000, which is reported in the line-item "gain on bargain purchase" in the fiscal 2021 Consolidated Statement of Net Income.


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Other

In connection with the Share Purchase Agreement, we entered into a supply agreement and rebate agreement with an affiliated company of our former joint venture partner to secure plant capacity utilization and preserve a sales channel for our mattress cover and fabric products. The supply and rebate agreements are effective as of the acquisition date and are based on future sales orders relative to current market conditions.

The transactions associated with the supply and rebate agreements will be accounted for in accordance with ASC Topic 606 Revenue from Contract with Customers. For the period from February 1, 2021, through May 2, 2021, shipments pursuant to the supply agreement were $379,000, and a charge of $25,000 pursuant to the rebate agreement was included in net sales in the fiscal 2021 Consolidated Statement of Net Income.

Acquisition-related costs totaling $30,000 were included in selling, general, and administrative expenses in the fiscal 2021 Consolidated Statement of Net Income.

Actual revenue and net loss from the acquisition date of February 1, 2021, through May 2, 2021, included in our fiscal 2021 Consolidated Statement of Net Income and totaled $379,000 and $(2,000), respectively.

Segment Assets


Segment assets consist of accounts receivable, inventory, property, plant, and
equipment, right of use assets, and our investment in an unconsolidated joint
venture.



                                              May 2,       May 3,
(dollars in thousands)                         2021         2020       % Change
Accounts receivable                          $ 20,427$ 12,212          67.3 %
Inventory                                      30,047       26,620          12.9 %
Property, plant & equipment                    41,264       40,682           1.4 %
Right of use assets                             4,278          362          N.M.

Investment in unconsolidated joint venture - 1,602 (100.0 )%

                                             $ 96,016$ 81,478          17.8 %



Refer to Note 18 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

As of May 2, 2021, accounts receivable increased by $8.2 million, or 67.3%, compared with May 3, 2020. This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020. Net sales for the fourth quarter of fiscal 2021 were $42.9 million, an increase of $19.6 million, or 83.9%, compared with net sales of $23.4 million during the fourth quarter of fiscal 2020, which was materially disrupted by the COVID-19 pandemic. Although, we experienced a substantial increase in net sales during the fourth quarter of fiscal 2021, the increase in accounts receivable was partially offset by faster cash collections during the fourth quarter of fiscal 2021 as compared with the fourth quarter of fiscal 2020. The faster cash collections are due to our customers' return to making payments based on normal credit terms as opposed to the extended terms granted during the fourth quarter of fiscal 2020 in response to the COVID-19 pandemic.

Days' sales outstanding was 43 days for the fourth quarter of fiscal 2021, compared with 48 days for the fourth quarter of fiscal 2020.

Inventory

As of May 2, 2021, inventory increased by $3.4 million, or 12.9%, compared with May 3, 2020. This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020. Net sales during the fourth quarter of fiscal 2020 were adversely affected by the economic disruption caused by the COVID-19 pandemic.

Inventory turns were 4.2 during the fourth quarter of fiscal 2021, compared with 3.3 during the fourth quarter of fiscal 2020.

Property, Plant, & Equipment

The $41.3 million as of May 2, 2021, represents property, plant, and equipment of $28.4 million, $12.0 million, and $855,000 located in the U.S., Canada, and Haiti, respectively. The $40.7 million as of May 3, 2020, represents property, plant, and equipment of $27.7 million and $13.0 million located in the U.S. and Canada, respectively.


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As of May 2, 2021, property, plant, and equipment slightly increased compared with May 3, 2020. The slight increase mostly represents (i) capital spending of $6.2 million associated with equipment to expand our capacity in North America to support our future growth plan, along with equipment and leasehold improvements totaling $846,000 that were acquired from CIH; partially offset by (ii) $6.0 million in depreciation expense.

Right of Use Assets

The $4.3 million as of May 2, 2021, represents right of use assets of $2.4 million, $1.4 million, and $400,000 located in Haiti, the U.S., and Canada, respectively. The $362,000 as of May 3, 2020, represents right of use assets located in the U.S.

As of May 2, 2021, right of use assets increased by $3.9 million compared with May 3, 2020. This increase represents (i) $2.5 million that pertained to building leases acquired from CIH; (ii) $879,000 that pertained to the renewal and amendment of a building lease associated with our mattress cover operation located in the U.S., and (iii) $550,000 that pertained to a new building lease associated with our Canadian mattress fabric operation.

Investment in Unconsolidated Joint Venture

As of May 3, 2020, our investment in unconsolidated joint venture represented our 50% ownership in CIH and was accounted for under the equity method in accordance with ASC Topic 823. Accordingly, the carrying value of our investment in CIH was reported as a single line item in the Consolidated Balance Sheets titled "Investment in unconsolidated joint venture". Effective February 1, 2021, we entered into an agreement with our former joint venture partner to acquire the remaining 50% interest in CIH. Pursuant to this transaction, we are now sole owner with full control over CIH. Accordingly, our consolidated financial statements now include all of the accounts of CIH, and any significant intercompany balances and transactions have been eliminated. Furthermore, the equity method will no longer be used and the former investment in unconsolidated joint venture is now included in the net assets of our now 100% interest in CIH.


Upholstery Fabrics Segment

Net Sales



                                     Twelve Months Ended
                          May 2,                  May 3,
(dollars in thousands)     2021                    2020                   % Change
Non-U.S. Produced        $ 133,029        94 %   $ 113,630        91 %         17.1 %
U.S. Produced                9,020         6 %      11,124         9 %        (18.9 )%
Total                    $ 142,049       100 %   $ 124,754       100 %         13.9 %



Upholstery fabrics sales increased 13.9% in fiscal 2021 compared to the prior year, which was materially disrupted by the COVID-19 pandemic during the fourth quarter.

The increase in upholstery fabrics net sales during fiscal 2021 reflects a significant increase in sales for our residential upholstery business compared to the prior-year period, partially offset by lower sales for our hospitality business, which remained under pressure due to pandemic-related disruptions to the travel and leisure industries. The increase in net sales for the year was also partially offset by the decrease in net sales during the first quarter of fiscal 2021 that resulted from the economic disruption caused by the COVID-19 pandemic, especially at the beginning of the first quarter as customers and retail stores were just beginning to resume operations following pandemic-related shutdowns.

The increased demand in our residential upholstery fabrics business was driven primarily by increased consumer focus on the home. We also benefitted from the success of our product innovation strategy, as well as the strength and flexibility of our platform in Asia, including our long-term supplier relationships and our expanded cut and sew capabilities in Vietnam.

Our highly durable, stain-resistant LiveSmart® performance fabrics, as well as our LiveSmart Evolve® performance plus sustainability fabrics, are important drivers of growth in our residential business. These product lines continued to experience strong demand trends amidst consumer desire for cleanability, ease of maintenance, and environmentally-conscious products.

Looking ahead, we are encouraged by the continuing strong backlog and demand trends in our residential upholstery business. We are also pleased to be expanding our capacity for cut and sewn upholstery kits with a new production facility in Haiti, which is expected to be completed during the second quarter of fiscal 2022. We believe the solid sales performance in our residential upholstery business will continue during fiscal 2022, absent additional pandemic-related shutdowns or material disruption in our customers' supply chains for non-fabric components. We are also cautiously optimistic that as vaccine rollouts continue, pent up demand for travel and leisure


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activities will ultimately benefit our hospitality business, although the timing of this return remains uncertain. However, the ongoing economic and health effects of the COVID-19 pandemic, as well as the duration of such effects, remain unknown and depend on factors beyond our control. At this time, we cannot reasonably estimate the ongoing impact of the pandemic on our upholstery fabrics segment, but note that if conditions worsen, the impact on our employees, suppliers, consumers, and the global economy could adversely affect our operations and financial performance.

Gross Profit and Operating Income



                                                   Twelve Months Ended
                                                   May 2,         May 3,
(dollars in thousands)                              2021           2020       Change

Gross profit from continuing operations $ 25,968$ 24,220 7.2 % Gross profit margin from continuing operations 18.3 % 19.4 % (110 ) bp SG&A expenses

                                         14,092       14,353        (1.8 )%
Income from continuing operations                     11,876        9,867        20.4 %
Operating margin                                         8.4 %        7.9 %        50 bp



The increase in upholstery fabrics profitability was primarily due to the increase in sales noted above, offset somewhat by unfavorable China foreign exchange rate fluctuations and reduced demand in our hospitality business.

Looking ahead, we expect that certain near-term headwinds, including rising freight and raw material costs and ongoing China foreign exchange rate fluctuations, may temporarily pressure our profitability during fiscal 2022. However, we expect that our recent price increase initiated at the end of the fourth quarter of fiscal 2021 will help mitigate the ongoing China foreign exchange rate fluctuations to some extent.

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.



                               May 2,       May 3,
(dollars in thousands)          2021         2020        % Change
Accounts receivable           $ 17,299$ 12,881           34.3 %
Inventory                       25,870       21,287           21.5 %
Property, plant & equipment      1,925        1,633           17.9 %
Right of use assets              5,945        1,633          264.1 %
                              $ 51,039$ 37,434           36.3 %




Accounts Receivable

As of May 2, 2021, accounts receivable increased by $4.4 million, or 34.3%, compared with May 3, 2020. This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020. Net sales for the fourth quarter of fiscal 2021 were $36.1 million, an increase of $12.1 million, or 50.4%, compared with net sales of $24.0 million during the fourth quarter of fiscal 2020, which was materially disrupted by the COVID-19 pandemic. Although we experienced a substantial increase in net sales during the fourth quarter of fiscal 2021, the increase in accounts receivable was partially offset by faster cash collections during the fourth quarter of fiscal 2021 as compared with the fourth quarter of fiscal 2020. The faster cash collections are due to our customers' return to making payments based on normal credit terms, as opposed to the extended terms granted during the fourth quarter of fiscal 2020 in response to the COVID-19 pandemic.

Days' sales outstanding was 42 days for the fourth quarter of fiscal 2021, compared with 47 days for the fourth quarter of fiscal 2020.

Inventory

As of May 2, 2021, inventory increased $4.6 million, or 21.5%, compared with May 3, 2020. This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021, compared with the fourth quarter of fiscal 2020. Net sales during the fourth quarter of fiscal 2020 were adversely affected by the economic disruption caused by the COVID-19 pandemic.

Inventory turns were 4.6 during the fourth quarter of fiscal 2021, compared with 3.8 during the fourth quarter of fiscal 2020.


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Property, Plant, & Equipment

The $1.9 million as of May 2, 2021, represents property, plant, and equipment of $1.1 million and $850,00 located in the U.S. and China, respectively. The $1.6 million as of May 3, 2020, represents property, plant, and equipment of $1.2 million and $471,000 located in the U.S. and China, respectively.

Right of Use Assets

The $5.9 million as of May 2, 2021, represents right of use assets of $5.0 million and $952,000 located in China and the U.S., respectively. The $1.6 million as of May 3, 2020, represents right of use assets of $857,000 and $776,000 of located in the U.S. and China, respectively.

As of May 2, 2021, right of use assets increased by $4.3 million, or 264.1%, compared with May 3, 2020. This increase mostly pertains to the renewal or the modification of lease terms associated with all our building leases associated with our operations located in China totaling $5.5 million, partially offset by amortization expense of $1.6 million.

Discontinued Operation - Home Accessories Segment

As previously disclosed, we sold our majority ownership interest in eLuxury, LLC ("eLuxury") during the fourth quarter of fiscal 2020, resulting in the elimination of our home accessories segment at such time. Accordingly, there are no results of operations for the home accessories segment reported in our continuing operations during fiscal 2021 and there were no assets and liabilities reported in our Consolidated Balance Sheets as of May 2, 2021, and May 3, 2020. See Note 3 - Home Accessories Segment - Discontinued Operation, of the consolidated financial statements for further details, and see the section titled "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - 2020 compared with 2019 - Segment Analysis - Discontinued Operation - Home Accessories Segment" in our Form 10-K filed with the Securities and Exchange Commission on July 17, 2020, for the fiscal year ended May 3, 2020, for additional information.

Other Income Statement Categories



                                                  Twelve Months Ended
                                                  May 2,         May 3,
(dollars in thousands)                             2021           2020       % Change
Selling, general, and administrative expenses   $    37,756$ 34,424           9.7 %
Asset impairments                                         -       13,712        (100.0 )%
Restructuring credit                                      -           70        (100.0 )%
Interest expense                                         51          106         (51.9 )%
Interest income                                         244          897         (72.8 )%
Gain on bargain purchase                                819            -         100.0 %
Other expense                                         2,208          902         144.8 %



Selling, General, and Administrative Expenses

SG&A expense increased during fiscal 2021, as compared to the prior year, due mostly to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets, partially offset by our significant cost cutting measures during the fourth quarter of fiscal 2020 that continued into the first quarter of fiscal 2021 as part of our comprehensive response to the COVID-19 global pandemic. These significant cost cutting measures primarily related to compensation and included (i) implementing temporary salary reductions, (ii) making workforce adjustments to align with demand, (iii) suspending merit pay increases, and (iv) aggressively reducing discretionary spending such as professional fees, travel and entertainment expenses, and certain marketing expenses.

Asset Impairments

During the fourth quarter of fiscal 2020, we recorded non-cash asset impairment charges totaling $13.7 million associated with goodwill and certain intangible assets, of which $11.5 million related to the mattress fabrics segment and $2.2 million related to the upholstery fabrics segment. These asset impairment charges were the result of our annual assessments of impairment regarding our goodwill and tradename that were performed as of May 3, 2020, in accordance with ASC Topic 350 Intangibles - Goodwill and Other. See Notes 8, 9, and 15 of the consolidated financial statements for further details regarding our assessments of impairment, conclusions reached, and the performance of our quantitative impairment tests.


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Interest Expense

During fiscal 2021, our interest expense was attributable to interest paid on amounts borrowed during the fourth quarter of fiscal 2020 in connection with the economic uncertainty associated with the COVID-19 global pandemic. As a result of this uncertainty and its overall effect on our business, we proactively borrowed $30.8 million from our lines of credit and applied for and received a $7.6 million loan pursuant to the SBA's Paycheck Protection Program ("PPP"). During the first quarter of fiscal 2021, we repaid in full the PPP loan and all the borrowings outstanding on our lines of credit as of May 3, 2020. Additionally, we did not incur any interest expense after the first quarter of fiscal 2021, as there were no borrowings outstanding on our line of credit agreements after such time.

The interest expense incurred during fiscal 2020 reflects our historically low level of borrowings outstanding.

Interest Income

Interest income reflects interest earned on our current investments of excess cash held in money market funds, short-term mutual bond funds, and investment-grade U.S. corporate, foreign, and government bonds, as well as interest earned on money market and mutual fund investments associated with our rabbi trust that funds our deferred compensation plan obligation. The decrease in interest income during fiscal 2021 compared with fiscal 2020 is due to mostly to a decrease in interest rates associated with these investments.

Gain on Bargain Purchase

Effective February 1, 2021, Culp International, a wholly-owned subsidiary of the company, acquired the remaining 50% ownership interest in CIH from its former joint venture partner. Pursuant to this transaction, we are now the sole owner with full control over CIH. The gain from bargain purchase represents the net assets acquired from this transaction that exceeded the $954,000 total purchase price.

See Note 2 - Business Combination Achieved in Stages, of the consolidated financial statements and see also the section titled "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - 2021 compared with 2020 - Segment Analysis - Mattress Fabrics Segment - CLASS International Holdings, Ltd. ("CIH")" of this Form 10-K for further details.

Other Expense

In accordance with ASC Topic 830 Foreign Currency Matters, management assesses certain economic factors to determine the currency of the primary economic environment in which our foreign subsidiaries operate. Based on our assessments, the U.S. dollar was determined to be the functional currency of our operations located in China and Canada.

The increase in other expense during fiscal 2021, as compared with fiscal 2020, is due mostly to significantly more unfavorable currency exchange rates associated with our operations located in China that were applied against balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S. dollar financial reporting amounts. During fiscal 2021, we reported foreign exchange rate losses totaling $1.4 million, compared with foreign exchange rate gains totaling $42,000 reported during fiscal 2020.

The $1.4 million foreign exchange rate losses incurred during fiscal 2021, which were mostly non-cash, were mostly offset by $1.3 million in income tax benefits, which reduced our income tax payments. These income tax benefits were associated with income tax deductible foreign exchange rate losses based on more unfavorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S. dollars to determine the corresponding Chinese Renminbi local currency amounts. The foreign exchange rate losses incurred on our U.S. dollar denominated balance sheet accounts associated with our operations located in China are income tax deductible as we incur income tax expense and pay income taxes in China's local currency.

See the Income Taxes - Effective Income Tax Rate & Income Tax Expense section below for further details on the income tax effects of the foreign exchange rate losses (gains) associated with our China operations on our consolidated effective income tax rate for fiscal 2021 and 2020, respectively.

Income Taxes

Effective Income Tax Rate & Income Tax Expense

We recorded income tax expense of $7.7 million, or 70.7% of income before income tax expense from continuing operations, in fiscal 2021, compared with income tax expense of $3.4 million, or (43.7%) of loss before income tax expense from continuing operations, in fiscal 2020. The following schedule summarizes the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:


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                                                            2021             2020
U.S. federal income tax rate                                    21.0 %           21.0 %
valuation allowance                                             78.4             (1.6 )
income tax effects of the 2017 Tax Cuts and Jobs Act           (33.8 )              -
global intangible low taxed income tax (GILTI)                     -            (19.0 )
foreign tax rate differential                                   10.9             (5.4 )

income tax effects of Chinese foreign exchange gains and losses

                                                      (8.4 )           (5.0 )
withholding taxes associated with foreign tax
jurisdictions                                                    7.7            (16.0 )
income tax effects of impairment of nondeductible
goodwill                                                           -            (11.3 )
other                                                           (5.1 )           (6.4 )
                                                                70.7 %          (43.7 )%

Income tax expense during fiscal 2021 included a $4.9 million net income tax charge, which consists of an $8.5 million non-cash income tax charge to record a full valuation allowance against the company's U.S. net deferred income tax assets, partially offset by a $3.6 million non-cash income tax benefit to re-establish certain U.S. Federal net operating loss carryforwards in connection with U.S.Treasury regulations enacted during the first quarter of fiscal 2021 regarding the Global Intangible Low Taxed Income ("GILTI") tax provisions of the Tax Cuts and Jobs Act of 2017 ("TCJA"). Income tax during fiscal 2020 included $1.5 million of GILTI tax that did not recur in fiscal 2021 due to the recent change in the GILTI tax regulations noted above. Additionally, our effective income tax rates for fiscal 2021 and fiscal 2020 were adversely affected by the continued shift in the mix of our taxable income that has been mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.

GILTI

Pursuant to the TJCA, GILTI became effective during our fiscal 2019. Our policy to account for GILTI is to expense this tax in the period incurred. As a result, we recorded an income tax charge totaling $1.9 million during fiscal 2020.

Effective July 20, 2020, the U.S. Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the TCJA. With the enactment of these final regulations, we are now eligible for an exclusion from GILTI since we meet the provisions for the GILTI High-Tax exception included in the final regulations. In addition, the enactment of the new regulations and our eligibility for the GILTI High-Tax exception are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years.

As a result of the newly enacted regulations, we recorded an income tax benefit of $3.6 million resulting from the re-establishment of certain U.S. federal net operating loss carryforwards. This $3.6 million income tax benefit was recorded as a discrete event in which its full income tax effects were recorded during the first quarter of fiscal 2021.

Deferred Income Taxes - Valuation Allowance

In accordance with ASC Topic 740, we evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a "more likely than not" standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.

As a result of the U.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against our U.S. net deferred income taxes as of the end of the first quarter of fiscal 2021. GILTI represented a significant source of our U.S. taxable income during fiscal 2019 and 2020 that offset our U.S. pre-tax losses during such years, and which offset is now reversed as a result of the retroactivity of the new GILTI regulations. Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulative U.S. taxable losses during the last two fiscal years, and we expected at the time of this assessment that our history of U.S. pre-tax losses would continue into fiscal 2021. As a result of the significant weight of this negative evidence, we believed that it was more likely than not that our U.S. deferred income taxes would not be fully realizable. Accordingly, we recorded a non-cash income tax charge of $7.0 million to provide for a full valuation allowance against our U.S. net deferred income tax assets. This $7.0 million income tax charge was recorded as a discrete event in which its full income tax effects were recorded during the first quarter of fiscal 2021.

As of May 2, 2021, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we have a recent history of significant cumulative U.S. taxable losses, and we have experienced U.S. taxable losses during each of the last three fiscal years. As a result of the significant weight of this negative evidence, we believe it


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is more likely than not that our U.S. net deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets totaling $11.7 million as of May 2, 2021.

Refer to Note 12 of the consolidated financial statements for additional disclosures regarding the valuation allowance against our U.S. net deferred income taxes.

Deferred Income Taxes - Undistributed Earnings from Foreign Subsidiaries

In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. As of May 2, 2021, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings from our foreign subsidiaries would not be reinvested indefinitely and therefore, would be eventually distributed to our U.S. parent company. The conclusion reached from our assessment is consistent with prior years. Accordingly, as of May 2, 2021, we recorded a deferred income tax liability associated with our undistributed earnings from foreign subsidiaries of $3.5 million.

Refer to Note 12 of the consolidated financial statements for additional disclosures regarding our deferred income tax liability associated with the undistributed earnings from our foreign subsidiaries.

Uncertainty in Income Taxes

In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.

As of May 2, 2021, we had a $1.4 million total gross unrecognized income tax benefit that relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. At this time, significant change associated with this income tax benefit is not expected within the next fiscal year.

U.S. federal income tax returns filed by us remain subject to examination for income tax years 2017 and subsequent. Canadian federal income tax returns filed by us remain subject to examination for income tax years 2017 and subsequent. Canadian provincial (Quebec) income tax returns filed by us remain subject to examination for income tax years 2017 and subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year 2016 and subsequent.

Refer to Note 12 of the consolidated financial statements for disclosures and additional information regarding our uncertain income tax positions.

Income Taxes Paid

The following table sets forth income taxes paid (refunded) by jurisdiction:


(dollars in thousands)                         2021        2020

United States Federal - AMT credit refunds $ (1,510 ) $ - United States Federal - transition tax

            226           -
China                                           2,874       3,397
Canada                                          1,408       1,598
                                             $  2,998$ 4,995

U.S. Alternative Minimum Tax (AMT)

In accordance with the TCJA, corporate taxpayers were eligible to treat prior AMT credit carryforwards as refundable. Accordingly, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable, and as a result, 50% of the $1.5 million refundable balance was expected to be received in each of our fiscal years 2021 and 2022, respectively. We received our first 50% installment totaling $746,000 during the first quarter of fiscal 2021. In accordance with the CARES Act, 100% of AMT credit carryforwards for tax years beginning in the 2019 tax year were immediately refundable. Accordingly, we claimed credit for the remaining 50% installment of our refundable AMT credit carryforward in May 2020. We received our remaining 50% installment plus interest totaling $764,000 during the second quarter of fiscal 2021.



Future Liquidity



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Although we will pay income taxes associated with our subsidiaries located in China and Canada, we currently expect U.S. cash taxes to be minimal during fiscal 2022. Pursuant to the TCJA, we elected to pay the U.S. Federal transition tax in annual installments over a period of eight years, of which $266,000 is due on August 15, 2021. Additionally, we currently we do not expect to pay any income taxes in the U.S. on a cash basis during fiscal 2022 due to: (i) our exclusion from GILTI tax as a result of U.S.Treasury regulations finalized and enacted on July 20, 2020; (ii) the immediate expensing of U.S. capital expenditures, and (iii) our existing U.S. Federal net operating loss carryforwards totaling $19.4 million.

2020 compared with 2019

For a comparison of our results of operations for the fiscal years ended May 3, 2020, and April 28, 2019, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year ended May 3, 2020, filed with the SEC on July 17, 2020.

Liquidity and Capital Resources

Overall

Currently, our sources of liquidity include cash and cash equivalents, short-term investments (available for sale), cash flow from operations, and amounts available under our revolving credit lines. These sources have been adequate for day-to-day operations, capital expenditures, debt payments, common stock repurchases, and dividend payments. We believe our cash and cash equivalents and short-term investments (available for sale) of $42.6 million as of May 2, 2021, and our cash flow from operations, will be sufficient to fund our business needs, commitments, and contractual obligations.

As of May 2, 2021, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively "cash and investments') totaled $46.9 million compared with $77.1 million as of May 3, 2020.

The decrease in our cash and investments from the end of fiscal 2020 is attributable to repayment of all our outstanding borrowings associated with our U.S. and China lines of credit and the loan we received under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") of 2020 (such loan, the "PPP loan"), which borrowings totaled $38.4 million. Excluding the repayments made on our lines of credit and the PPP loan, our cash and investments as of May 2, 2021, would have increased $8.2 million as compared with May 3, 2020. This increase was mostly due to (i) net cash provided by operating activities totaling $21.5 million, partially offset by (ii) $6.7 million of capital expenditures that were mostly related to our mattress segment, (iii) cash payments of $954,000 associated with our acquisition of the remaining fifty percent ownership interest in our former unconsolidated joint venture in Haiti, and (iv) cash payments of $5.3 million in the form of regular quarterly dividend payments to shareholders.

Our net cash provided by operating activities of $21.5 million during fiscal 2021 increased $16.5 million compared with $5.0 million during fiscal 2020. The increase reflects higher earnings and a focused attention on working capital management through fiscal 2021. Additionally, our discontinued operation had net cash used in operating activities totaling $(2.3) million and net cash used in investing activities totaling $(134,000) during fiscal 2020. Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions from the company and the former non-controlling interest holder of eLuxury, totaling $2.4 million during fiscal 2020. We believe our liquidity has improved in the absence of the former home accessories segment due to the significant losses incurred by that segment and the funding of its working capital requirements primarily by us through loans and capital contributions that are no longer required.

As of May 2, 2021, there were no outstanding borrowings under our lines of credit.

The income taxes we pay also affect our liquidity. See the above section titled "Income Taxes Paid" of this Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION for further details.

Our cash and cash equivalents and short-term investments may be adversely affected by factors beyond our control, such as the continuing uncertainty of the COVID-19 global pandemic, lower net sales due to consumer demand, and delays in receipt on accounts receivable. Additionally, our liquidity will be affected by our strategic investments in working capital, planned capital expenditures, and the start-up of our new upholstery fabrics operation located in Haiti.

By Geographic Area

We currently hold cash and investments in the U.S. and our foreign jurisdictions to support operational requirements, to mitigate our risk related to foreign exchange rate fluctuations, and for U.S. and foreign income tax planning purposes.


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A summary of our cash and investments by geographic area follows:




                          May 2,       May 3,
(dollars in thousands)     2021         2020
United States            $ 34,465$ 65,327
China                      10,635       10,531
Canada                      1,525        1,160
Haiti                         220            -
Cayman Islands                  8           42
                         $ 46,853$ 77,060

As discussed above, the decrease in our cash and investments, specifically in the U.S., as of May 2, 2021, compared with May 3, 2020, is attributable to repayment of all the outstanding borrowings associated with our lines of credit and PPP loan, which totaled $38.4 million.

Dividend Program

On June 15, 2021, our board of directors approved a regular quarterly cash dividend of $0.11 per share. This payment will be made on July 16, 2021, to shareholders of record as of July 9, 2021.

During fiscal 2021, dividend payments totaled $5.3 million, which represented quarterly dividend payments ranging from $0.105 to $0.11 per share. During fiscal 2020, dividend payments totaled $5.1 million, which represented quarterly dividend payments ranging from $0.10 to $0.105 per share.

Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. Future dividend payments will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.

Common Stock Repurchases

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased, and the timing of such purchases, will be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

As part of our comprehensive response to the COVID-19 global pandemic, we announced on April 3, 2020, that our board of directors temporarily suspended the share repurchase program given the ongoing economic disruption and uncertainty. On March 2, 2021, our board of directors reinstated the share repurchase program.

During fiscal 2021, we did not repurchase any shares of common stock. As a result, as of May 2, 2021, we had $5.0 million available for additional repurchases of our common stock. During fiscal 2020, we repurchased 142,496 shares of our common stock at a cost of $1.7 million pursuant to the authorization approved by our board of directors on September 5, 2019.

Working Capital

Operating Working Capital

Operating working capital (accounts receivable and inventories, less deferred revenue and accounts payable-trade and capital expenditures) was $50.2 million as of May 2, 2021, compared with $49.4 million as of May 3, 2020. Operating working capital turnover was 6.4 during the fourth quarter of fiscal 2021 compared with 5.1 during the fourth quarter fiscal 2020.

Accounts Receivable

Accounts receivable as of May 2, 2021, were $37.7 million, an increase of $12.6 million, or 50.3%, compared with $25.1 million as of May 3, 2020. This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021 as compared with the fourth quarter of fiscal 2020, which was adversely affected by the economic disruption caused by the COVID-19 global pandemic. Net sales for the fourth quarter of fiscal 2021 were $79.1 million, an increase of $31.7 million, or 66.9%, compared with net sales of $47.4 million during the fourth quarter of fiscal 2020.


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Days' sales outstanding was 43 days for the fourth quarter of fiscal 2021, as compared with 47 days for the fourth quarter of fiscal 2020.

Inventory

Inventories as of May 2, 2021, were $55.9 million, an increase of $8.0 million, or 16.7%, compared with $47.9 million as of May 3, 2020. This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021 as compared with the fourth quarter of fiscal 2020. Net sales during the fourth quarter of fiscal 2020 were adversely affected by the economic disruption caused by COVID-19.

Inventory turns were 4.8 during the fourth quarter of fiscal 2021, compared with 3.5 during the fourth quarter of fiscal 2020.

Accounts Payable

Accounts payable - trade as of May 2, 2021, were $42.5 million, an increase of $19.5 million, or 84.9%, compared with $23.0 million as of May 3, 2020. This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020. Net sales during the fourth quarter of fiscal 2020 were adversely affected by the economic disruption caused by the COVID-19 pandemic. In addition, the increase in accounts payable is due to longer credit terms obtained from certain vendors during fiscal 2021.

Financing Arrangements, Commitments and Contingencies, and Contractual Obligations

The Company has elected to early adopt the amendment to Item 303 of Regulation S-K and, accordingly, is no longer required to provide a contractual obligation table. However, please refer to the descriptions of our financing arrangements, commitments and contingencies, and contractual obligations outlined below and the applicable Note references to our consolidated financial statements noted below for disclosure of the cash requirements associated with these items.

Revolving Credit Agreements

Currently, we have revolving credit agreements with banks for our U.S. parent company and our operations located in China. The purposes of our revolving lines of credit are to support potential short-term cash needs in different jurisdictions, mitigate our risk associated with foreign currency exchange rate fluctuations, and ultimately repatriate earnings and profits from our foreign subsidiaries to our U.S. parent company to take advantage of the TCJA, which allows a U.S. corporation a 100% dividend received income tax deduction on earnings and profits repatriated to the U.S. from 10% owned foreign corporations.

As of May 2, 2021, we did not have any outstanding borrowings associated with our revolving credit agreements.

Our loan agreements require, among amount other things, that we maintain compliance with certain financial covenants. As of May 2, 2021, we were in compliance with these financial covenants.

Refer to Note 11 of the consolidated financial statements for further disclosure regarding our revolving credit agreements.

Leases

Refer to Note 13 of the consolidated financial statements for disclosure of our lease obligations, which includes a five-year maturity schedule.

Capital Expenditures

As of May 2, 2021, we had total amounts due regarding capital expenditures totaling $348,000 which pertained to outstanding vendor invoices, none of which were financed. Additionally, as of May 2, 2021, we had open purchase commitments to acquire equipment for our U.S. and Canadian mattress fabrics operations totaling $1.6 million.

Uncertain Income Tax Positions

As of May 2, 2021, we had $1.4 million of total gross unrecognized tax benefits, which primarily relate to double taxation under applicable income tax treaties with foreign tax jurisdictions. The outcome of these income tax uncertainties is dependent upon various matters including tax examinations, legal proceedings, competent authority proceedings, changes in regulatory tax laws, or interpretations of those tax laws, or expiration of statutes of limitation. As a result of these inherent uncertainties, we cannot reasonably estimate the timing of payment on this amount, if any.


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Capital Expenditures and Depreciation Expense

Capital expenditures on a cash basis were $6.7 million during fiscal 2021, compared with $4.6 million during fiscal 2020. Capital expenditures for fiscal 2021 and 2020 mostly related to our mattress fabrics segment.

Depreciation expense was $6.8 million during fiscal 2021, compared with $7.8 million during fiscal 2020. Depreciation expense for fiscal 2021 and 2020 mostly related to our mattress fabrics segment.

For fiscal 2022, we are currently projecting cash capital expenditures on a consolidated basis to be in the range of $9 million to $10 million. Our capital expenditures will focus on the following areas:

   •  Maintenance level of capital spending centered on our mattress fabrics
      segment;


  • Equipment and leasehold improvements associated with Read;


  • Information technology infrastructure and security; and


   •  Equipment and leasehold improvements associated with our new design and
      innovation campus located in downtown High Point, NC.

Depreciation expense on a consolidated basis is projected to be approximately $7 million during fiscal 2022. The estimated depreciation expense for fiscal 2022 mostly relates to our mattress fabrics segment.

The estimated capital expenditures and depreciation expense for fiscal 2022 are management's current expectations only, and changes in our business and the unknown duration and financial impact of the COVID-19 global pandemic could cause changes in our plans for capital expenditures and expectations for related depreciation expense. Funding for capital expenditures is expected to be primarily from cash provided by operating activities.

Handling Costs

We record warehousing costs in SG&A expenses. These costs were $3.9 million during fiscal 2021 and $4.0 million during fiscal 2020. Warehousing costs include the operating expenses of our various finished goods distribution centers, such as personnel costs, utilities, building rent and material handling equipment, and lease expense. Had these costs been included in cost of sales, gross profit would have been $45.9 million, or 15.3% of net sales, during fiscal 2021, and $36.5 million, or 14.2% of net sales, during fiscal 2020.

Inflation

Any significant increase in our raw material costs, utility/energy costs, and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating increases on to customers.

Critical Accounting Estimates

U.S. generally accepted accounting principles require us to make estimates and assumptions that affect our reported amounts in the consolidated financial statements and accompanying notes. Our estimates are based on (i) currently known facts and circumstances, (ii) prior experience, (iii) assessments of probability, (iv) forecasted financial information, and (v) assumptions that management believes to be reasonable but that are inherently uncertain and unpredictable. We use our best judgment when measuring these estimates, and if warranted, use external advice. Due to the uncertain and unpredictable nature of our estimates, actual results could differ from the estimates that were previously reported in our consolidated financial statements.

As of May 2, 2021, we believe the following list represents our critical accounting estimates that have or are reasonably likely to have a material affect on our financial condition or results of operations. For a discussion of all our significant accounting policies, including our critical accounting policies, refer to Note 1 of the consolidated financial statements.

Inventory Valuation

We operate as a "make-to-order" and "make-to-stock" business. Although management closely monitors demand in each product to decide which patterns and styles to hold in inventory, the availability of low-cost imported products and shifts in consumer preferences and styles subject the company to markdowns of inventory.

Management continually examines inventory to determine if there are indicators that the carrying value exceeds its net realizable value. Historical experience has shown that the most significant indicator that would require inventory markdowns is the age of the inventory and the planned discontinuance of certain fabric patterns. As a result, we provide inventory valuation markdowns based upon set percentages for inventory aging categories of six, nine, twelve, and fifteen-months that are determined based on historical experience and judgment. Also, we provide inventory valuation write-downs based on the planned discontinuation of certain products based on


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current market values at the time of assessment compared with their current carrying values. While management believes that adequate markdowns for inventory have been made in the consolidated financial statement, significant unanticipated changes in demand or changes in consumer tastes and preferences could result in additional inventory markdowns in the future.

As of May 2, 2021, and May 3, 2020, the reserve for inventory markdowns was $6.1 million and $6.8 million, respectively.

Income Taxes - Valuation Allowance

In accordance with ASC Topic 740 Income Taxes, we evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that we assess whether a valuation allowance should be established based on the consideration of all available evidence using a "more likely than not" standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.

To determine if a valuation allowance is required or needs to be subsequently reversed, we use significant judgment when considering the effect of all positive and negative evidence identified and giving weight to that evidence. The weight given to the potential effect of positive and negative evidence is based on the extent to which it can be objectively verified. Our judgments are often based on estimates that are derived from (i) forecasted financial information, (ii) assumptions on when certain taxable or deductible events will occur, and (iii) interpretation of complex income tax laws and regulations.

As of May 2, 2021, we recorded a full valuation allowance against all our U.S. net deferred income tax assets totaling $11.7 million. As of May 3, 2020, we recorded a partial valuation allowance of $3.1 million that pertained to certain U.S. state loss carryforwards and a U.S. capital loss carryforward. No valuation allowances were recorded against any deferred income tax asset balances associated with our operations located in China and Canada as of May 2, 2021, and May 3, 2020.

Refer to Note 12 of the consolidated financial statements for additional disclosures regarding our assessments and conclusions reached regarding our valuation allowance as of May 2, 2021, and May 3, 2020.

Stock-Based Compensation

ASC Topic 718, Compensation-Stock Compensation, requires that all stock-based compensation be recognized as compensation expense in the financial statements and that such cost be measured at the grant date fair value.

Compensation expense for performance-based restricted stock units is recognized based on an assessment each reporting period of the probability that certain performance goals will be met during the contingent vesting period. If performance goals are not probable of occurrence, no compensation expense will be recognized. Previously recognized compensation cost on performance goals that were previously deemed probable and subsequently were not met or not expected to be met is reversed. Determining the probability of the vesting of our performance-based restricted stock units requires judgment, including assumptions used to forecast future financial results. While our forecasts of future financial results represent management's best estimates, these involve inherent uncertainties. As a result, if we revised our assumptions and estimates during the vesting period, our stock-based compensation expense could be materially different than previously expected.

We estimate the fair value of our performance-based restricted stock units that have a market condition using a Monte Carlo valuation model. The Monte Carlo valuation model incorporates inputs and complex assumptions that include (i) the closing price of our common stock at the respective grant date, (ii) expected volatility of our common stock, (iii) expected volatility and correlation coefficient of our peer companies that are approved by the Compensation Committee of our board of directors, (iv) risk-free interest rate, and (v) dividend yield. The determination of the inputs and complex assumptions used, and the application of the Monte Carlo valuation model, requires significant judgment by management and advice from an external advisor.

There were no performance-based restricted stock units granted during fiscal 2021.

We recorded $1.3 million, $614,000, and $130,000 of compensation expense within selling, general, and administrative expense for our equity-based awards in fiscal 2021, 2020, and 2019, respectively.

Adoption of New Accounting Pronouncements

Refer to Note 1 of the consolidated financial statements for recently adopted accounting pronouncements for fiscal 2021.

Recently Issued Accounting Standards

Refer to Note 1 of the consolidated financial statements for recently issued accounting pronouncements for fiscal 2022 and beyond.


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